Winnie Sun, Contributor
April 27, 2022
Thinking of retiring soon? The recent news of rampant inflation may be throwing a monkey wrench into your plans. U.S. inflation surged to a new four-decade high of 8.5% in March (from the same month a year ago), driven by skyrocketing energy and food costs , supply chain problems and high consumer demand.
Healthcare, housing, travel, and supporting adult children – all subject to inflation –make up a lot of what seniors spend money on. But that doesn’t mean you shouldn’t go through with your retirement plans; it just means that you need to have a clear understanding of what the inflation assumption is in the financial planning tool that your advisor is using.
Jumping from an assumed inflation rate of 2.4% to a rate of 4% reduces the net return on the typical portfolio from 4.6% to 3%. This seemingly small difference can have a huge impact on portfolio sufficiency projections, and in your ability to maintain your purchasing power throughout your retirement.
In addition, the commonly used 60% stocks / 40% bonds allocation averaged an annual rate of return of 11.1% during the decade ending in 2021, according to Goldman Sachs. So that formula may not work any more.
Here are some ways you can safely retire while coping with inflation:
Reduce housing costs – Trading in a larger home for a smaller one, even if the mortgage is paid off, reduces the monthly outflow for property taxes, utilities, homeowners insurance, and maintenance. You can also consider moving to a less costly location or renting out that spare bedroom.
Rethink your expenses – Having an accurate estimate of what your expenses will be in retirement is very important because it will affect how much you withdraw each year and how you invest your account. If you understate your expenses, you easily outlive your portfolio, or if you overstate your expenses, you can risk not living the type of lifestyle you want in retirement. And of course you should always looks for ways to cut expenses.
Meet with your financial advisor – A financial professional can help you build a suitable plan and test out different scenarios. And make sure that you update your plan regularly, taking into account current market conditions and goal changes.
- Review your portfolio – This is a good time to review your overall allocation and confirm whether you are investing appropriately, given your time horizon and other factors in your financial plan. Consider including a higher exposure to commodities, dividend-paying stocks, inflation-protected bonds and publicly traded real estate.
- Understand and manage your Social Security benefits – If you don’t have your statement, you can get it online by using your my Social Security account. If you don’t yet have an account, you can easily create one. Your online statement gives you secure and convenient access to your earnings records. It also shows estimates for retirement, disability and survivors benefits you and your family may be eligible for.
- Know the price of claiming early – The longer you can afford to wait after age 62 (up to 70), the larger the monthly benefit for the rest of your life. If you wait until your age 70 to start claiming benefits, then you’ll get an extra 8% per year—or, in total, 132% of your primary amount.
- Do your homework – You can do the math for your own situation using the Social Security Administration (SSA) Early or Late Retirement Calculator. Other factors should be considered, including your expected longevity and whether you (or your spouse) plan to file for spousal benefits. If you’re married, you and your spouse should carefully coordinate when each of you will file for Social Security benefits. The choices you make now could have a big impact on your combined Social Security income — both when you’re together in retirement and, later on, if one of you is widowed.
- Know your tax status – Your Social Security benefits may be partially taxable if your combined income exceeds certain thresholds. Regardless of how much you make, the first 15% of your benefits is not taxed.
- Pay Down Debts – If you are paying high interest rates on credit cards, pay down the debt with the highest interest rate first.
- Meet with your financial advisor before claiming benefits – Maximizing your Social Security payments can be complicated, especially for married couples. Advisors can help you determine when to tap Social Security, as well as provide advice on investments and help you create a solid budget.
- Consider Medical Care – Medical care is a big expense that people in retirement often don't factor in. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover healthcare expenses in retirement. According to the Centers for Medicare and Medicaid Services (CMS), per capita, health spending for elderly Americans was three times that of a working adult.
- Get a second gig – You may want to get a second job to bring in more income.
- Rethink Your Kids’ Education – Assuming high levels of debt for your children’s education while also trying to fund a successful retirement can be a significant challenge in a higher-inflation environment. Consider starting your child at a community college for the first two years, a substantial savings over a four-year college. And, if at all possible, start saving for college when your child is a toddler. Also rethink whether it is really necessary to put your child into a private school. Today there are many public school options, including charter and specialized magnet schools.
After working your way through all of the above, you may also want to consider waiting at least a year or two before retiring. Some of the top reasons people decide to stay in the workforce a bit longer include wanting to add to their retirement nest egg, feeling concerns about rising costs, not wanting to dip into retirement funds too early and needing to take care of a relative or friend.
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